CBRT battling against capital outflows

Turkey’s central bank (CBRT) delivered a hawkish surprise in raising its one-week repo rate to 46.00% today, which came against the backdrop of continued FX reserve losses and large capital outflows since the domestic political turmoil in March. Further capital flight will continue to put downward pressure on the lira and keep interest rates higher for longer - we've now raised our year-end policy rate forecast to 40.00%. Meanwhile, there has been a sharp downwards reassessment of the outlook for interest rates in Poland this month, with a growing consensus now calling for the central bank to cut rates next month. We think these expectations may have gone too far, though, and the wage and retail sales figures released next week may dampen prospects for rate cuts in the coming months.